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Ep 62 - Higher Salary or Equity Compensation

The immediate benefit of a higher salary is a temptation in its own right. We often want things sooner rather than having to wait for them. But what if another compensation route could prove far more lucrative in the long run? How would that change your future, not just your present? This episode of the podcast I want to walk you through the things you should consider as you’re asking and answering the question, “Do I want a higher salary now, or is equity compensation something I could benefit from?”

You will want to hear this episode if you are interested in...

  • What happens if your employer offers you lower salary but stock options included [0:22]
  • Equity compensation in general is becoming more common [1:26]
  • This week’s FLASHBACK [9:32] 

Equity compensation in general is becoming more common

I’m seeing more and more often that employees are asking employers about stock options as a means of receiving compensation. It makes total sense to me and is one of the ways you can set yourself up for a brighter financial future. But it’s not always easy to know if the salary included with the equity compensation option is right, compared to the stock options. And that is not an easy question to answer. This episode is designed to help you think it through as best as you can. There’s no easy formula or one-size-fits-all approach.

The pros and cons of lower salary and stock options VS higher salary

When trying to figure out which option is best for you — lower salary and stock options VS a higher salary — the question becomes an issue of a trade-off. Do you take the money now and forget the options? Or, do you take less now and gain future and possibly greater income through stock options. Here are some things to consider...

  1. If you choose to take the higher salary
  • You have immediate cash in-hand 

This is helpful if you have bills, a vacation planned, your children’s college education to pay for, or other expenses that you foresee on the horizon. The lesser salary could make it difficult to swing these.

  • You are risking nothing

If it’s important to you that you don’t risk the income you’re receiving in any way, the higher salary is the way to go.

  1. Take the lower salary with stock options

Before we get to the pros and cons, it’s important to understand a bit about why your employer might offer stock options in the first place...

  • Your employer is preserving cash for the company to work with
  • You are also more likely to stick around (employee retention) if you take stock
  • Stock options often attract better job candidates
  • Employees are motivated to work toward a higher stock price for the company

But from your vantage point, what should you consider?

  • There’s no risk unless the company stock goes down
  • If you doubt that the company stock will go up, it’s not for you
  • If you believe the company stock will go up, it could be a winner

Be sure to get an appropriate and competitive starting salary as well. It’s not a simple decision so talk to your family, trusted advisors, and don’t be afraid to ask for more help to understand the pros and cons of the decision.

This week’s FLASHBACK: The Christmas Tree at my first house

Too much house, with not enough furniture to fill it. A huge picture window which we decided would frame our Christmas tree. We wound up going to a tree farm and got a tree that was far too large. The tree was almost as wide as the living room itself.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.